Chinese manufacturing sets a positive tone
China set the tone for a day of manufacturing data with a positive reading on the Caixin manufacturing PMI. The data came in ahead of expectations at 51.7, well above the 50.6 expected and pushing activity in the Chinese manufacturing sector well into expansion territory. The evidence of continued demand from heavy industry in China helped give industrial metal prices a positive start to 2018. The industrial data from China lends weight to the idea that the somewhat unexpected global growth rebound that underscored 2017 will continue into 2018.
Commodities and China in 2018
Commodities as well resource-influenced sectors of the stock market performed well in 2017. Brent crude oil put in an annual gain of 17% while copper traded on the LME soared 31% last year. The price trends for commodities remain positive, opening up more gains in early 2018. A combination of Chinese government economic support, a pickup in global growth and a falling US dollar all contributed to the strong performance for metals as well as mining stocks last year. The emphasis on economic growth removed from China’s Communist Party five-year plan does cloud the outlook. The risk moving forward is that natural demand cannot pick up the slack, weighing on commodity prices.
FTSE 100 on track for record start
The UK share-index finished 2017 with a record high and looks set to start 2018 in a similar manner. The positive data out of China means miners could be topping the table in early trading. The out-performance of the heavily weighted mining sector was one reason alongside currency-weakness that propelled the UK benchmark higher last year. Traders will be looking for clues where big money will park funds for 2018 in the first few days of January. We think the price breakout in UK blue-chip stocks means momentum will be in their corner for the opening quarter of 2018.
Election worry to mean a soggy start in Europe
European equity benchmarks look set for a lower open on Tuesday. The announcement that a national election will take place in Italy on March 4 sent Italian bond yields higher and is contributing to the weakness of European shares. After the best year since 2013, election-risk means investors may be slow to get back on the wagon of European shares. Overall, we sense the risk to markets surrounding Italian elections has come down. Populists made inroads in 2017 but failed to clinch victory. The election success of Emmanuel Macron as well as the UK stepping aside has given rise to some optimism that 2018 could be the year that the EU makes a bigger push for closer integration.
Boris Reshuffle
Talk of a Boris Johnson reshuffle out of the British foreign office is having limited effect on the pound. The replacement of cabinet office minister Damien Green offers the chance of a strategic reshuffle. The move seems too bold for Theresa May in the early days of the New Year, though a wider reshuffle makes sense. The impact of any Boris-replacement on the pound largely depends on the role he’d move into. The bigger role Boris has in determining the fate of Brexit, probably the more negative impact we would see on Sterling. One to watch will be the possible replacement of Phillip Hammond at the Treasury. Switching away from the reliable ‘spreadsheet Phil’ could rattle markets. The monetary policy implications of BOE governor Mark Carney penning his letter to the Chancellor to explain why inflation missed its target by more than 1% to its highest in more than 5 years is a positive backdrop for Sterling.
Forex markets await more manufacturing data
Mixed results are anticipated for manufacturing data on Tuesday in Europe, the UK and the US. Activity in France, Germany and the US is expected to remain unchanged while a moderation is expected in the UK. Forex volumes may be a little thin ahead of the release of Federal Reserve minutes on Wednesday and US employment data on Friday.
Opening Calls
FTSE 100 to open 7 points higher at 7694
DAX to open 37 points lower at 12,880
CAC to open 8 points lower at 5304